Who You Calling the Dumb Money?

Rip up the tickets, there’s really only one gargantuan winner in the era of zero interest rates and highly correlated markets: It’s Vanguard, the not-for-profit that runs index mutual funds and ETFs out of the goodness of its own heart.

Wait til you see the asset gathering record they’ve just broken this year (emphasis Daddy’s)…

Vanguard Group Inc., the biggest U.S. mutual-fund firm, attracted more money from investors in the first nine months of 2012 than it has in any full calendar year in its 38-year history.

The company won $113 billion in deposits in mutual funds and exchange-traded funds through September, John Woerth, a spokesman, said today in an e-mail. The Valley Forge, Pennsylvania-based company received $104 billion in 2007, the previous high.

“We’re pleased that investors recognize Vanguard as the low-cost fund leader and continue to entrust assets to us,” Woerth said.

Vanguard has benefited as investors pull money from actively managed funds and plow it into products that track indexes. Mutual funds whose managers pick domestic stocks experienced redemptions of $497 billion in the five years ended June 30 while index funds took in $117 billion, data from Chicago-based Morningstar Inc. show.

What can we learn from this: Investors are being completely rational and logical. When given the choice between higher-cost, actively managed products and effectively zero-cost passive indexes, they are choosing the latter.

Interestingly enough, the research confirms that they are making the correct choice – especially in a low return, low rate environment.

Who you calling the Dumb Money?

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